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Most companies possesses their own unique way of “running the numbers” to evaluate investment into new projects and products. And with the perfect crystal ball, one can gaze into the future and know just how the market will respond to a new product launch and to sales revenues. It’s a fairly straight forward exercise then to calculate the following:
- Will the revenue projections support today’s investment into the product?
- Does the net present value of future sales support the level of investment required to launch this product?
- What is the internal cost of capital and what discount rate provides a promising net present value for future sales?
- What factors may influence sales projections at a future date?
- When will we start making money?
- What cash burn-rate can we tolerate before making money?
Unfortunately, nearly every financial prediction has a time component representative of some future market condition that clearly
no crystal ball can answer. To calculate a product’s net present value requires a prediction of the revenue stream emanating
from that product over time and as we all know, today’s market circumstances may not represent the situation several years
from now. Fortunately, there are two proven
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approaches to achieving some market predictability for a pharmaceutical product and
when used in combination, they afford an enduring alternative to traditional generic products competing on cost. The two approaches, working in synergy are to couple drug product intellectual property protection with an effective branding strategy. Financial metrics and objectives can then be calculated with a reasonable degree of confidence from the expected market sustainability without margin erosion. In other words, the time component to the financial analysis is substantially diminished—why? Product patent coverage for an allowed patent extends for twenty years from the date of filing.
These concepts are bounded by two circumstances which define the “field of play”. The first is to compare the financial constraints from head-to-head generic competition. The first FDA approved generic can reasonably expect to obtain at least 50% market share by giving up 5 – 40% on AWP. As a second generic enters market, competitive price erosion is often aggressive and market share declines sharply. To maintain margin and profitability, the generic offerings attempt to reduce cost of goods (COG) by pressuring suppliers and transferring manufacturing offshore. The financial consequences are devastating since product pricing falls sharply while the COG will reach an asymptotic minimum. Clearly, it’s a losing proposition. An “authorized generic” has some chance of staving off this catastrophe, but the tidal wave will hit.
The other boundary can be represented by product line extension of the innovator’s product. For instance, it’s obvious to all that as an innovator’s product nears the end of its patent life, it’s a good idea to pump new blood into the product. This approach can be accomplished by re-formulation and potentially, by new patents. The new patents may take many forms including new therapeutic application, combination products, etc., but the intent is to maintain sales related to the existing product. This also presents a moving target to potential generic competitors and with the added burden of overcoming new patent protection. It’s all too common today to see a generic product market approval granted simultaneously to several companies with essentially disastrous financially consequences to all. In order to play at all, it’s a race to the bottom—the lowest prices, the lowest margins and the lowest profitability. Of course, some companies are willing to accelerate the time component to wrestle away patent coverage from the innovator. Paragraph IV filings and other litigious methods sometimes are effective, but the odds with this approach are not favorable either.
So, what is the field of play that allows for responsible answers to be provided to the questions above? Few answers are available which meet the conditions of a responsible business plan and are not subject to the penalties incurred at the boundaries . One answer is to launch products wherein the API’s safety and efficacy are well established but for which additional features are provided in the product offering. Critical to this approach is a branding strategy and patented chemistry; together market protection and predictability are provided. The answers to the questions become:
- Revenue projections are anticipated to increase for the next period (say over five years) based on an increasing market share, a predictable cost structure and significant barriers (patents) to competitive entry.
- With revenue predictions based on market demand and business fundamentals, a development allocation in the amount of (fill in blank) is justified.
- A lower threshold can be assigned to the cost of capital since significant risk is removed from the project based on the branding strategy and product protection. Also, the percentage rate associated with discounted cash flows (DCF) can be evaluated under present market conditions.
- A competitive drug product having the same therapeutic classification may be launched but must have substantially improved performance to overcome the cost hurdles and our approach can withstand balance sheet competition.
- Crossing into positive territory begins with FDA approval and an effective product launch compatible with a branding strategy.
- Cash burn rates are predictable and manageable for product development and launch given the market position we will acquire.
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